2025 (7) TMI 755 - AT - Income Tax

Allowable business expenditure - Royalty paid under the head Administrative and other expenses - According to AO the assessee is making royalty payment without serving the purpose of the business. Therefore expenses claimed by the assessee is not wholly and exclusively for the purpose of business - HELD THAT -Assessee has applied for the registration u/s 12A of the Act however the same was rejected. Further going through the Income Expenditure Account we observe that assessee is making these payments to G.D. Goenka Pvt. Ltd. on the pretext that G.D. Goenka Pvt. Ltd. has registered trademark/patent. We observe that the registered trademark/ patent was held by Anjani Kumar Goenka not by the G.D. Goenka Pvt. Ltd.. Since the G.D. Goenka Pvt. Ltd. does not have trademark/patent registered in their name they cannot claim the royalty even though it was out of an agreement held with Anjani Kumar Goenka. It was not clear what is rationale and basis for G.D. Goenka Pvt. Ltd. to claim the royalty on the assessee which is also established with the same name. Royalty can be treated as a proper expenditure if it is entered with holder of the actual registered trademark/patent holder. It is irrelevant of the fact that the company G.D. Goenka Pvt. Ltd. has declared the same as income in their books of account. Looking at the income and expenditure account it looks like a tax planning to shift the profit from the trust to the private limited. Therefore we are inclined to accept the findings of the ld. CIT (A). Accordingly Ground No.2 raised by the assessee is dismissed. Disallowance of consultancy charges in its Profit Loss account under the head Professional Expenses - HELD THAT - The assessee has incurred and utilized services of different persons and it is fact on record that to run a school it needs several professional and temporary teachers to run the school efficiently. The assessee has submitted payment to various consultants through bank and deducted relevant TDS. It clearly shows that the services of the consultants and teachers are required for running of the business and there is no reason for assessee to pay these consultants who are not related or having any interest in the Trust. Therefore these payments were made to unrelated persons and CIT (A) has already acknowledged the fact that there may or may not be any agreement and based on the affidavit filed by the assessee, these expenditures were incurred solely and wholly for the purpose of business therefore we are inclined to allow the expenditure incurred by the assessee. Accordingly ground no.3 raised by the assessee is allowed. Additional rent claimed by the assessee - assessee was asked to justify the rent paid for financial year 2010-11 for the additional area of rent as per the letter which is w.e.f. 01.04.2011 - assessee submitted that there is a typographical error in the dates mentioned in the aforementioned two letters - HELD THAT - We observe that the assessee has taken lease from G.D. Goenka Pvt. Ltd. initially for 40, 000 sq.ft. and subsequently it has taken additional 30, 000 sq.ft. The assessee has submitted two letters before the AO for justifying for acquiring additional space for renting the school. However the letter submitted before AO contained the date as 15.03.2011. It was submitted before us that it is a typographical error and the date should have been 15.03.2010. As submitted before us that the assessee has increased the strength of the students and that required additional space to run the school. It was submitted that it was supported by the increase in revenue collection for the year under consideration. Revenue declared during the year was Rs. 19.88 crores as compared to Rs. 9.37 crores in the immediately preceding assessment year. It was submitted that the revenue has almost doubled during the year and also it has continued in the subsequent assessment year 2012-13 and 2013-14 with the revenue of Rs. 14.28 crores and Rs15.24 crores respectively. It was submitted that not only revenue has been increased expenditures were increased in line with the increase in revenue. It was prayed that the typographical mistake in recording the letter may be overlooked and considering the increase in revenue which supports the requirement of additional space in this case. After considering the detailed submissions and increase in revenue it clearly shows that assessee has increased the business substantially and this is possible only because of enrolment of additional students. Revenue cannot be increased without increasing peripheral facilities to impart the education. Therefore relying on certain clerical mistake the revenue cannot reject the submissions of the assessee and revenue has not brought any other material to controvert the submissions of the assessee. Therefore we are inclined to allow the additional rent claimed by the assessee. Accordingly ground raised by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals relate to the following issues:

(a) Whether the payment of royalty by the assessee to G.D. Goenka Pvt. Ltd. for use of the name "G.D. Goenka" is allowable as a business expenditure under the Income Tax Act, 1961, particularly under section 37(1), given that the assessee itself bears the name GDG Educational Trust and the trademark is registered in the name of a third party, not G.D. Goenka Pvt. Ltd.

(b) Whether the consultancy charges claimed by the assessee, paid without formal agreements but supported by invoices and TDS deductions, are allowable as business expenses under section 37(1) of the Income Tax Act, 1961.

(c) Whether the excess rent paid by the assessee to G.D. Goenka Pvt. Ltd. beyond the initially agreed leased area is allowable, considering the dispute over the effective date of the lease extension and the typographical errors in the supporting letters.

(d) The validity and applicability of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961, and consequential interest under sections 234A, 234B, and 234C, though these issues were considered premature or consequential and not extensively adjudicated.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Allowability of Royalty Payments

Relevant Legal Framework and Precedents: Section 37(1) of the Income Tax Act mandates that expenses must be "wholly and exclusively" for the purpose of business to be deductible. The principle that one cannot pay for something one already possesses was emphasized by the AO. The legitimacy of royalty payments depends on the existence of a valid trademark holder and the genuineness of the business purpose.

Court's Interpretation and Reasoning: The AO disallowed the royalty payments of Rs. 1,23,26,025/- on the ground that the assessee, bearing the name GDG Educational Trust, was paying royalty to G.D. Goenka Pvt. Ltd. for use of the name "G.D. Goenka," despite the trust's prior registration and inherent right to use the name. The AO further noted that the registered trademark/patent was held by Anjani Kumar Goenka, not by G.D. Goenka Pvt. Ltd., thereby questioning the legitimacy of the royalty claim by the latter. The AO concluded that the payment was not wholly and exclusively for business purposes and appeared to be a tax planning device to shift profits from the trust to the private limited company.

The ld. CIT(A) upheld the AO's disallowance, emphasizing the lack of justification for the royalty payments, the absence of benefit commensurate with the expenditure, and the self-serving nature of the Memorandum of Understanding (MoU) between the trust and G.D. Goenka Pvt. Ltd. The CIT(A) also rejected the assessee's reliance on the payee's income declaration as irrelevant to the allowability of the expense in the hands of the trust.

At the Tribunal, the assessee argued that the royalty was paid for use of a registered trademark owned by Anjani Kumar Goenka and licensed to G.D. Goenka Pvt. Ltd., which in turn granted franchise licenses to various institutions including the trust. The assessee contended that once the trust's activities were treated as business activities, the expenses should be allowed as business expenditures.

The Tribunal observed that the trademark was not registered in the name of G.D. Goenka Pvt. Ltd., which undermined the basis for royalty payments to that company. The Tribunal found the rationale for royalty payments to be unclear and agreed with the lower authorities that the payments were not justified. The Tribunal noted that the mere declaration of income by the payee company does not validate the expense in the hands of the trust. The Tribunal concluded that the disallowance was justified and dismissed the ground.

Key Evidence and Findings: The MoU dated 29.05.2009; registration dates of the trust; trademark registration details; income and expenditure accounts; absence of direct trademark ownership by G.D. Goenka Pvt. Ltd.; and the nature of the payments.

Application of Law to Facts: The Tribunal applied the principle that expenses must be wholly and exclusively for business, and since the trust was entitled to use its own name, the royalty payments lacked business justification. The absence of trademark ownership by the payee company negated the genuineness of the royalty payments.

Treatment of Competing Arguments: The Tribunal rejected the assessee's argument based on the trademark licensing chain and the payee's income declaration, emphasizing legal ownership and business purpose over form.

Conclusion: Royalty payments to G.D. Goenka Pvt. Ltd. were disallowed for all relevant assessment years.

Issue (b): Allowability of Consultancy Charges

Relevant Legal Framework and Precedents: Section 37(1) requires expenses to be wholly and exclusively for business. The genuineness and documentation of such expenses are critical for allowability.

Court's Interpretation and Reasoning: The AO disallowed consultancy charges of Rs. 60,02,700/- due to absence of agreements, unknown qualifications of consultants, and lack of terms and conditions. The AO viewed the payments as unsubstantiated.

The ld. CIT(A) remanded the matter and after considering the affidavit filed by the assessee and the AO's remand report, allowed 75% of the claimed consultancy expenses, disallowing 25% on an ad hoc basis due to incomplete documentation.

The Tribunal accepted the CIT(A)'s reasoning, noting that payments were made by cheque, TDS was deducted and deposited, and the consultants were unrelated third parties engaged for short periods to conduct classes or administrative functions. The Tribunal found no cogent material to disallow the entire expenditure and recognized the practical reality of educational institutions engaging temporary professionals without formal contracts. The affidavit was treated as a valid legal document supporting the genuineness of payments.

Key Evidence and Findings: Invoices, TDS certificates, affidavits, absence of formal contracts, payment through banking channels, and nature of consultancy services.

Application of Law to Facts: The Tribunal applied the principle of allowability of business expenses, considering the nature of the educational business and the practicalities involved in engaging temporary professionals.

Treatment of Competing Arguments: The Tribunal rejected the Revenue's argument that absence of agreements invalidated the expenses, emphasizing the totality of evidence including TDS and payment modes.

Conclusion: Consultancy charges were allowed in full, overturning the AO's disallowance and partially modifying the CIT(A)'s ad hoc disallowance.

Issue (c): Allowability of Excess Rent Paid

Relevant Legal Framework and Precedents: Rent payments must be supported by valid lease agreements and incurred wholly and exclusively for business.

Court's Interpretation and Reasoning: The AO allowed rent for 40,000 sq.ft. as per the registered lease agreement but disallowed rent for additional 30,000 sq.ft. due to the dates on letters submitted by the assessee indicating the lease extension was effective from 01.04.2011, which pertained to the subsequent year, not the year under assessment.

The assessee contended that the dates on the letters were typographical errors and that the effective date should be 01.04.2010, supported by increased revenue and expenditure indicating expansion of business and need for additional space. The assessee also pointed to the payee company's declaration of rental income and payment of taxes as evidence of genuineness.

The CIT(A) upheld the AO's disallowance, relying on the dates as recorded in the letters and rejecting the typographical error claim.

The Tribunal, after considering the substantial increase in revenue from Rs. 9.37 crores to Rs. 19.88 crores and continuing growth in subsequent years, found the assessee's explanation plausible and the typographical error claim reasonable. The Tribunal noted the absence of any contradictory material from the Revenue and the logical necessity of additional space for increased student strength. The Tribunal allowed the additional rent claimed.

Key Evidence and Findings: Lease agreement dated 29.05.2009; letters requesting additional space dated 15.03.2011 and 23.03.2011 with alleged typographical errors; income and expenditure statements showing increased revenue; rental income declared by G.D. Goenka Pvt. Ltd.

Application of Law to Facts: The Tribunal applied the principle of allowability of rent as a business expense and accepted the assessee's explanation of typographical errors supported by business growth evidence.

Treatment of Competing Arguments: The Tribunal rejected the Revenue's strict reliance on dates and afterthought argument, emphasizing substance over form and commercial realities.

Conclusion: Excess rent paid for additional leased area was allowed for the assessment year under consideration.

Issue (d): Penalty and Interest

The penalty under section 271(1)(c) was considered premature and was not adjudicated in detail. Interest under sections 234A, 234B, and 234C was consequential and dependent on the outcome of the primary issues.

3. SIGNIFICANT HOLDINGS

"For an expense to be deductible, Sec. 37(1) requires that it should be 'wholly and exclusively for the purpose of business'. This is not the case here."

"The registered trademark/patent was held by Anjani Kumar Goenka not by the G.D. Goenka Pvt. Ltd.. Since the G.D. Goenka Pvt. Ltd. does not have trademark/patent registered in their name, they cannot claim the royalty even though it was out of an agreement held with Anjani Kumar Goenka."

"The fact that payments were made through banking channels and even TDS was deducted at the applicable rate, suggests that the expenditure was indeed incurred."

"It is well known fact that the educational institutions engage temporary teachers or qualified professionals for short period, to take classes/ sessions for the students and to fill the gap for shortage of teaching staff etc."

"Relying on certain clerical mistake, the revenue cannot reject the submissions of the assessee and revenue has not brought any other material to controvert the submissions of the assessee."

Core principles established include the necessity of genuine business purpose and proper legal ownership for royalty payments, recognition of practical realities in educational institutions for consultancy expenses, and acceptance of commercial realities and substance over form in rent payment disputes.

Final determinations:

- Royalty payments to G.D. Goenka Pvt. Ltd. disallowed for all relevant assessment years.

- Consultancy charges allowed in full for all relevant years.

- Excess rent paid for additional leased area allowed for the assessment year 2011-12.

- Penalty and interest issues not adjudicated substantively.